When researching potential dividend stocks, looking at solid blue-chip stocks is always a good bet. Many investors tend to focus only on stocks included in the Dow Jones Industrial average. This is not necessarily a bad strategy since the Dow includes some of the finest companies in America and 29 of the 30 stocks in the Dow also pay dividends. However, selecting the top dividend stocks is not as easy as just selecting the highest yielding stocks.
While a stock’s dividend yield is one of the major factors in evaluating dividend stocks, it should not be the only investing criteria. Simply looking at the dividend yield of the 30 Dow stocks would indicate that Verizon (NYSE:VZ) and AT&T (NYSE:T) are the top Dow dividend stocks. However, eDividendStocks.com has undertaken a more detailed analysis of the 30 Dow stocks and you may be surprised to find that there are more compelling dividend stocks available.
First, let’s take a look at Verizon and AT&T. Far and away, they offer the highest dividend yields of any of the 30 Dow components. Sagging stock prices for both major telecoms has pushed their dividend yields higher in 2010 and are now approaching 7%. However, those sagging stock prices should also be a warning sign for investors.
This year, Verizon shares have fallen over 13% and AT&T’s stock has plunged over 10%. The only Dow component to post a worst performance this year has been Alcoa’s 17% tumble.
Assuming that Verizon and AT&T’s stock prices stabilize at their current levels, dividend investors who bought the stock at the beginning of this year would still have negative returns in 2010. That’s despite receiving a dividend yield of nearly 7%.
Of course, we understand that it is impossible to predict future stock performance, but looking closer at Wall Street consensus earnings estimates doesn’t provide much hope for a rally in the near term. Wall Street anticipates that Verizon’s earnings will actually decline by 2% in 2010, while AT&T’s earnings are only expected to grow by 3%.
AT&T and Verizon also have two of the highest payout ratios of any Dow stocks at 77% and 83% of their expected 2010 earnings respectively. These high payout ratios become more worrisome given the limited earnings growth expected over the next couple of years.
Here are three Dow stocks that dividend investors should consider ahead of Verizon and AT&T:
El Dupont de Nemours (NYSE:DD)
DuPont recently report solid fourth quarter results and increased their 2010 earnings guidance. Management believes that they can deliver annual sales growth of at least 10% over the next three years. DuPont also happens to be the third highest yielding stock in the Dow Jones index offer investors a 5% dividend yield.
Dividend Yield: 5.0%
2010 EPS Growth: 16%
2010 Est. Dividend Payout Ratio: 70%
While Chevron’s fourth quarter results were disappointing, the subsequent sell-off provides investors a great entry point. Wall Street expects earnings to grow by 62% in 2010 and the consensus 1-year price target for Chevron is $86. There is also speculation that Chevron could increase its dividend in an effort to return more cash back to their shareholders.
Dividend Yield: 3.8%
2010 EPS Growth: 62%
2010 Est. Dividend Payout Ratio: 35%
Intel delivered exceptionally strong fourth quarter earnings results and provided 2010 guidance that exceed Wall Street’s expectations. However, the stock is down over 9% since reporting those strong numbers. Wall Street expects EPS to more than double in 2010 and yet the stock trades at only 12x 2010 consensus earnings.
Dividend Yield: 3.2%
2010 EPS Growth: 112%
2010 Est. Dividend Payout Ratio: 40%
Disclosure: No Positions